Financial Fraud Enforcement Task Force Has Ambitious Agenda

By Benjamin P. Saul – June 13, 2013

The overall economy and the housing market in particular have shown significant signs of improvement recently. Yet, the pressure that banks and financial-services companies face to reform their practices has not eased. The regulators and enforcement officials charged with protecting the financial markets have continued to press banks to reform their practices, shifting their sights from overhauling the housing market to other financial products, such as auto lending, student loans, and payday lending. A critical—but often overlooked—player guiding this aggressive enforcement agenda is the Financial Fraud Enforcement Task Force.

The Emergence of the Financial Fraud Enforcement Task Force
Following the financial crisis, manycriticized the pre-crisis regulatory structure, arguing that regulators frequently operated in silos incapable of foreseeing the broader risks that a financial institution’s conduct could have on the overall economy. To increase coordination among the various federal and state actors charged with protecting consumers and financial markets, President Obama established the Financial Fraud Enforcement Task Force in November 2009.

The task force has a broad mandate: identify fraud trends, develop enforcement priorities and strategies, and coordinate investigations of fraud and discrimination in the lending and financial markets. To fulfill this mandate, more than 20 federal agencies, including the Consumer Financial Protection Bureau (CFPB), Department of Justice (DOJ), U.S. Attorneys’ offices, Treasury, the Department of Housing and Urban Development, as well as state partners actively participate in the task force. In recent remarks, Attorney General Eric Holder has described the task force as “the biggest and broadest coalition of law enforcement officials, investigators, and regulatory agencies ever assembled to combat fraud.” The task force has led several high-profile initiatives to combat fraud, including the “Distressed Homeowner Initiative”—a national effort announced in 2012 that targeted alleged fraud against homeowners. As a result of this initiative, 110 federal civil cases have been filed against over 150 defendants as well as 285 criminal indictments filed by the Justice Department.

Detecting and prosecuting financial fraud is not the task force’s only focus. Operating within the task force are several active working groups, including the Non-Discrimination Working Group, the Residential Mortgage-Backed Securities Working Group, and the Consumer Protection Working Group. These working groups have led investigations on a variety of issues. For example, the task force was instrumental in coordinating the $25 billion national mortgage settlement reached with the nation’s five largest mortgage servicers to resolve allegations of mortgage servicing and foreclosure abuses. The task force and the Non-Discrimination Working Group also play an important role in the Justice Department’s investigations into possible fair-lending violations.

The Task Force’s Enforcement Priorities
Considering the key role the task force has played in many high-profile investigations, banks and financial institutions should pay close attention to its stated priorities. On March 20, 2013, Michael Bresnick, executive director of the task force, gave a speech at the Exchequer Club of Washington, D.C., highlighting many of the recent accomplishments of the task force. More importantly, however, the director outlined several of the task force’s priorities for the coming year. His remarks provide important signals about where the task force is focusing its attention, and banks and financial-services companies should follow these guideposts to mitigate their exposure to enforcement and investigation risks.

After discussing a number of areas of known focus for the task force—residential mortgage-backed securities fraud, mortgage fraud, fair-lending enforcement, and servicemember protection—Director Bresnick outlined three other areas where the task force is focusing its attention: (i) the “government’s ability to protect its interests and ensure that it does business only with ethical and responsible parties;” (ii) discrimination in indirect auto lending; and (iii) financial institutions’ role in fraud by their customers, which include third-party payment processors and payday lenders.

In briefly discussing the task force’s second priority, indirect auto lending, Director Bresnick noted that the Non-Discrimination Working Group “has placed an increased focus on enforcement of discrimination by auto lenders.” He also highlighted that the DOJ’s Civil Rights Division is working closely with the CFPB on this issue. Notably, on March 21—the day after Mr. Bresnick’s remarks—the CFPB issued Bulletin 2013-02, providing guidance to bank and nonbank indirect auto lenders on the bureau’s fair-lending concerns about lenders’ practice of permitting dealer interest-rate markups and compensating dealers on that basis. The CFPB asserts that, by allowing dealers to exercise discretion in marking up customers’ interest rates, lenders may be liable under the legal theories of both disparate treatment and disparate impact when pricing disparities on a prohibited basis exist within their portfolios.

Mr. Bresnick also explained in detail the task force’s third priority—focusing on “the role of financial institutions in mass marketing fraud schemes—including deceptive payday loans, false offers of debt relief, fraudulent health care discount cards, and phony government grants, among other things—that cause billions of dollars in consumer losses and financially destroy some of our most vulnerable citizens.” He noted that the task force’s Consumer Protection Working Group is investigating third-party payment processors (the businesses that process payments for merchants) and financial intermediaries because these institutions are the “bottlenecks, or choke-points” in the fraud committed by merchants.

By allowing merchants committing fraud to access the national banking system, Director Bresnick emphasized that the financial intermediaries “facilitate the movement of money from the victim of the fraud to the scam artist.” He also noted that the task force has “observed that some financial institutions actually have been complicit in these schemes, ignoring their BSA/AML obligations, and either know about—or are willfully blind to—the fraudulent proceeds flowing through their institutions.”

For banks, Mr. Bresnick delivered a strong compliance message: “Maintaining robust BSA/AML policies and procedures is not merely optional or a polite suggestion. It is absolutely necessary, and required by law.” To drive home this point, Mr. Bresnick cautioned that banks’ relationships with payment processors are receiving “significant attention” from the DOJ. He underscored this increased attention by citing a bank’s recent agreement to pay a $15 million civil money penalty to resolve allegations that, among other things, the bank failed to oversee third-party-payment-processor relationships.

In his remarks, Mr. Bresnick also offered some proactive strategies banks could employ to manage the regulatory and compliance risks arising from processing transactions. He encouraged banks to conduct due diligence before using third-party payment processors. Additionally, he noted some red flags that may indicate fraudulent activity, including high return rates on the payment processor’s accounts.

The director’s remarks also touched upon another area receiving heightened scrutiny from regulators and consumer groups—financial institutions’ relationships with payday lenders. In particular, he emphasized that financial institutions “should consider whether originating debit transactions on behalf of Internet payday lenders—particularly where the loans may violate state laws—is consistent with their BSA obligations.” Although he acknowledged that it was not a simple task for financial institutions to determine whether the loans being processed through it violate the state law where the borrower resides, he suggested “at a minimum, banks might consider determining the states where the payday lender makes loans, as well as what types of loans it offers, the APR of the loans, and whether it makes loans to consumers in violation of state, as well as federal, laws.”

Conclusion
The enforcement agenda outlined by Director Bresnick is ambitious, reinforcing the enforcement priorities recently sketched out by the CFPB and the Office of the Comptroller of the Currency. It also complements the ongoing efforts by FinCEN and the Federal Deposit Insurance Corporation regarding payment-processor relationships. The task force is leading a broad, increasingly aggressive, and coordinated financial-services enforcement agenda for federal regulators and enforcement authorities. Although lenders have many competing compliance priorities, because the task force plays a central role in guiding the enforcement activities of all these actors, institutions are wise to focus on its enforcement agenda.

Keywords: consumer litigation, CFPB, DOJ, Bresnick

Benjamin P. Saul is a partner with BuckleySander LLP in Washington, D.C. and is a cochair of the Consumer Litigation Committee.